How Omicron Will Affect India’s Interest Rates
New Delhi: The Reserve Bank of India will likely keep its policy rate at an all-time high for a ninth consecutive meeting, with a new variant of the virus seen as the latest threat to the central bank’s efforts to bring politics back to normal.
The 28 economists polled by Bloomberg on Monday expect the six-member monetary policy committee to leave the buyback rate unchanged at 4% on Wednesday. Even bets on the repo rate – the level at which the RBI absorbs bank liquidity – are heavily skewed towards expectation, underscoring the difficulty it faces in containing price pressures while supporting economic growth. .
“Since the pandemic, the RBI has done exactly this balancing act, and the pandemic is not yet over,” said Soumya Kanti Ghosh, chief economist at the State Bank of India, the largest state lender. from the country. âIn this context, delaying standardization measures is prudent in the current situation. “
Governor Shaktikanta Das is due to announce the MPC’s decision via a webcast on Wednesday at 10 a.m. in Mumbai. Here’s what else to watch out for in his speech:
Traders will still seek advice on the inevitable return of policy to pre-pandemic settings, with markets forecasting a two-step hike in the reverse repo rate, starting on Wednesday. Only seven of 24 economists surveyed see this happening, while others do not foresee any change.
Shorter money market rates and initial yields have already risen in recent weeks, with the monetary authority increasing liquidity absorption by increasing both the amount and duration of floating rate reverse repo auctions. The liquidity absorption milestones coincided with the RBI halting its October policy bond buying program, which marked the start of a reduction in the stimulus of the pandemic era.
Expectations of a hike are “rooted in swap and bond levels,” said Naveen Singh, executive vice president and head of transactions at ICICI Securities Primary Dealership Ltd. reverse repo rate regardless of omicron spread.
India’s sovereign yield curve has been steepest in a decade, in large part due to record excess bank liquidity that has driven short-term rates down. According to Barclays Plc, actions by the central bank to squeeze excess liquidity and stop bond buying have in turn pushed up limit yields in recent bond auctions, leading to higher rates in the Marlet.
Inflation, repeatedly described by Das as transient, is once again trending towards the upper end of the RBI’s 2-6% target range. Rising prices for vegetables, especially tomatoes, and a waning favorable base effect could threaten the central bank’s forecast of 5.3% price growth for the fiscal year ending March.
Concerns about price pressures would certainly be a topic of interest, especially in the context of comments by Federal Reserve Chairman Jerome Powell that it was time for the Fed to remove the description of high inflation as “Transient”. But that may not be enough to spur Indian policymakers to act at this time.
Five of the six MPC members were, in October, still in favor of maintaining an accommodative policy in order to avoid the risks associated with global developments. With the omicron variant spreading rapidly, this could be the reason the RBI must stand up.
“The world is waiting for more data to understand the potential impact and effectiveness of existing vaccines against the omicron variant,” said Kunal Kundu, economist at SociÃ©tÃ© GÃ©nÃ©rale GSC Pvt. in Bangalore. âIf the RBI also sees it as a threat to the nascent recovery, it may want to put plans to normalize policy on hold. ”
While the latest high-frequency indicators ranging from purchasing manager surveys to consumption tax data show Asia’s third-largest economy on the rise, these gains could be wasted if the risks of the spread rapid omicron materialize.
For now, the RBI is expected to maintain its growth forecast at 9.5% for the fiscal year ending in March, while signaling downside risks.
“Headwinds from slowing external demand, global supply bottlenecks, inflationary pressures and the expected Federal Reserve cut are expected to temper the strength of the rebound,” Bloomberg economist said Abhishek Gupta, who recently raised the growth forecast for fiscal 2022 to 8.9% from 7.8%. .